A 'Penguin' Market
August 29th 2007 10:03
What do penguins and the current markets have in common?
As soon as the sun sets the penguins will return to their nests after a long day of swimming and fishing. The birds will wait for all to turn up upon beaching before marching off together to their nests located further inland, usually among the bushes. This is their defensive behavior against any possible predators or intruders. The penguins will all rush back to the water upon any form of disturbance to their march, be it the cheeky seagull obstructing the way or even a small stone thrown on to their path, even though it may be harmless.
They are just scared.
Until everything is clear, they resume the journey back home again together, very much of a 'herd' mentality.
Sounds familiar? Yes, the market has become a 'penguin'.
Fresh news of the same but ageing issue, US subprime fall out and possible consequence of an economic slowdown, pushed the market lower today. The ASX S&P 200 benchmark index fell by 1.23% at closing to 6100.3 points, as fears rise again that the credit slump will drag down economic growth.
Just about any news related to the 'credit slowdown' or 'mortgage defaults' will send the markets swirling, usually to the downside. Roger Ehrenberg of Information Arbitrage suggests that investors be cool and chill out in order to ride out the turbulence.
'Every day brings some other piece of bad news. This lender is in trouble, this economic statistic looks bad, sentiment is poor, etc. These are times when it is best to adopt the Warren Buffet posture - avoid CNBC, Wall Street chatter and all forms of PR-driven hysteria. If we could move to Omaha, we'd all be better off at times like these.
Because at the end of the day, all the current news cycle does is play on our human weaknesses and tempt us to make perverse decisions. Like selling out of fear. Like bailing out of perfectly good equities and fixed-income securities because of generalizing problems across individual securities and asset classes. And this is why most investors are poor at being active managers while a precious few take advantage of this phenomenon to feast on the rest of us.
[...]
My best guess is that things will be pretty ugly for the next 12-18 months. I don't anticipate that the market will crater, but I do think the ripple effects of troubles with mortgage securities and the real estate sector will have far-reaching effects, and cause an economic adjustment that will be painful and time consuming.
I think we'll be entering a stock-pickers market, one where those with a deep-value orientation and stock-picking skill will shine. The cream rises to the top in uncertain times, where margins of safety are large and actual performance and returns on invested capital carry the day. My hypothesis is that the top long/short managers that have been running 100/40 long/short books will become much flatter, much less net-long, and revert to 80/60-type positions where conviction and analysis rule.
I may be wrong, but it feels like a time similar to the early 2000s when top long/short managers just ripped it while the tech bubble was deflating. Time will tell, but this is my "blink" visceral reaction to the goings on. To the extent you can, act like one of these hedge fund managers. Keep a cool head. Really get a grip on your portfolio. And don't do anything rash. Because there are a group of smart, opportunistic, dispassionate people out there ready to take the other side of the trade and eat your lunch.'
So remember, Be Cool.
As soon as the sun sets the penguins will return to their nests after a long day of swimming and fishing. The birds will wait for all to turn up upon beaching before marching off together to their nests located further inland, usually among the bushes. This is their defensive behavior against any possible predators or intruders. The penguins will all rush back to the water upon any form of disturbance to their march, be it the cheeky seagull obstructing the way or even a small stone thrown on to their path, even though it may be harmless.
They are just scared.
Until everything is clear, they resume the journey back home again together, very much of a 'herd' mentality.
Sounds familiar? Yes, the market has become a 'penguin'.
Fresh news of the same but ageing issue, US subprime fall out and possible consequence of an economic slowdown, pushed the market lower today. The ASX S&P 200 benchmark index fell by 1.23% at closing to 6100.3 points, as fears rise again that the credit slump will drag down economic growth.
Just about any news related to the 'credit slowdown' or 'mortgage defaults' will send the markets swirling, usually to the downside. Roger Ehrenberg of Information Arbitrage suggests that investors be cool and chill out in order to ride out the turbulence.
'Every day brings some other piece of bad news. This lender is in trouble, this economic statistic looks bad, sentiment is poor, etc. These are times when it is best to adopt the Warren Buffet posture - avoid CNBC, Wall Street chatter and all forms of PR-driven hysteria. If we could move to Omaha, we'd all be better off at times like these.
Because at the end of the day, all the current news cycle does is play on our human weaknesses and tempt us to make perverse decisions. Like selling out of fear. Like bailing out of perfectly good equities and fixed-income securities because of generalizing problems across individual securities and asset classes. And this is why most investors are poor at being active managers while a precious few take advantage of this phenomenon to feast on the rest of us.
[...]
My best guess is that things will be pretty ugly for the next 12-18 months. I don't anticipate that the market will crater, but I do think the ripple effects of troubles with mortgage securities and the real estate sector will have far-reaching effects, and cause an economic adjustment that will be painful and time consuming.
I think we'll be entering a stock-pickers market, one where those with a deep-value orientation and stock-picking skill will shine. The cream rises to the top in uncertain times, where margins of safety are large and actual performance and returns on invested capital carry the day. My hypothesis is that the top long/short managers that have been running 100/40 long/short books will become much flatter, much less net-long, and revert to 80/60-type positions where conviction and analysis rule.
I may be wrong, but it feels like a time similar to the early 2000s when top long/short managers just ripped it while the tech bubble was deflating. Time will tell, but this is my "blink" visceral reaction to the goings on. To the extent you can, act like one of these hedge fund managers. Keep a cool head. Really get a grip on your portfolio. And don't do anything rash. Because there are a group of smart, opportunistic, dispassionate people out there ready to take the other side of the trade and eat your lunch.'
So remember, Be Cool.
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